Chinese stocks to decline 10% in next six months

Coutts & Co says Chinese equities are set to fall on the back of deteriorating economic momentum globally, tight liquidity conditions and downside risks to corporate earnings in China.

Ryan Tsai, senior investment strategist for Greater China, said: “Although the long-term picture for China remains positive, we expect further declines in Chinese equities over the next six months.” The investment strategist also believes the slump is set to continue until some negative factors fade in 2012.

Coutts & Co, a private banking arm Royal Bank of Scotland (RBS), anticipates risk of a further 10% decline in the Hang Seng China Enterprises Index (HSCEI) to below 9,000 over the next six months.

Meanwhile, the firm’s latest report found the current estimates for earnings growth in the MSCI China Index of 19% and 16% in 2011 and 2012 respectively are over-optimistic given the heightened risk of a US recession.

“We forecast a 6% decline in 2012, driven by slower revenue growth, a squeeze on profit margins and the need for banks to raise provisions against bad debts,” it added.

The firm now favours yuan-denominated corporate bonds over equities until the global economic outlook stabilises, while forecasting the currency will appreciate 5%-6% against the dollar in 2011 and 4% in 2012

For stock investment, the firm suggests defensive sectors, such as consumer staples, utilities and telecoms, are better placed to weather the headwinds and continued volatility in equity markets.

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